Erik Prince and Bubblin Crude: “Oil that is, black gold, Texas tea”

Erik Prince and Bubblin Crude: “Oil that is, black gold, Texas tea”

By David Isenberg

If you have been following the news recently you would have seen a spate of articles regarding Erik Prince’s latest business venture, Frontier Resources Group.

At this point those who follow PMSC issues should all know who Erik Prince is. But for those who have dropped in from Mars suffice it to say that he is cofounder and former CEO of the well-known private security firm formerly known as Blackwater, then Xe Services, and now Academi.

Prince recently became chairman of FRG, a Hong Kong-listed company of which China’s state-backed investment fund Citic owns 15 per cent. According to the Oman Observer, Prince himself has share options in the firm that would convert to a 9 per cent stake.

Consider this Phase 2 in Mr. Prince’s evolution and public image rebranding in his post-Blackwater era.

Phase 1 was the writing and publicizing of his book Civilian Warriors about Blackwater, the main public meme of which seems to be that Blackwater was the greatest thing for the U.S. military since sliced bread and would be loved by everyone if not for the machinations of the dastardly liberal media and the perfidious pin striped bureaucrats at the State Department who prevented him from telling the truth about how great Blackwater was. (Prince’s new motto: When the going gets tough, the tough go whining.)

However, this post is not about the past and Blackwater but about FRG and the future.

Mr. Prince might not go down in the business history books as a model of managerial efficiency but give him credit for one thing: he knows how to spot an opportunity for making money. He got in early and profited hugely by being able to spot the U.S. government’s turn towards outsourcing military functions formerly held in the public sector.

Now he is about to do the same thing by getting in on the coming black gold boom, to borrow from the Beverly Hillbillies.

FRG is supposed to provide providing logistics for oil and mining companies in various parts of Africa. It is no secret that the world’s one and only Hidden Dragon and Crouching Lion, also known as China, is increasingly looking to Africa to meet its increasing demands for natural resources, especially hydrocarbons.

While all of this is public knowledge the scale of what is about to happen is not generally appreciated outside the petroleum industry. But thanks to a recent study by the U.S. Army War College the economic bonanza that will be reaped in the future can be fully understood.

The frenetic search for hydrocarbons in Africa has become so intense and wide ranging that there is planned or ongoing oil and gas exploration in at least 51 of the continent’s 54 countries.

Onshore and offshore rifts and basins created when the African continent separated from the Americas and Eurasia 150 million years ago are now recognized as some of the most promising hydrocarbon provinces in the world. Offshore Angola and Brazil, Namibia and Brazil, Ghana and French Guyana, Morocco and Mexico, Somalia and Yemen, and Mozambique and Madagascar are just a few of the geological analogues where large oil fields have been discovered or are believed to lie. One optimistic but quite credible scenario is that future discoveries in Africa will be around five times their current level based on what remains unexplored on the continent versus currently known sub-soil assets.

Africa had proven oil reserves of 132.4 billion barrels at the end of 2011, an increase of 154 percent over the 1980 figure of 53.4 billion barrels. Because of definitional issues of what constitutes “proven reserves,” however, this figure likely grossly underestimates Africa’s oil and gas potential and does not include likely future reserves.

Africa will be the world’s fourth most important region for oil production from 2010 to 2035, after the Middle East and Europe/Eurasia, not far behind North America, and ahead of Latin America and East Asia/Australia. Africa is also starting to play a more prominent role in international markets for natural gas, which is currently characterized by disparate regional markets but is slowly moving toward a more interconnected, global gas market. One reason for this is the Panama Canal expansion, which will allow much larger PANAMAX LNG tankers to unite the Atlantic Basin and the Pacific Basin—much as the advent of oil supertankers fostered a global market in oil. Africa’s total natural gas production will increase rapidly over the next 2 decades, from 188.1 million tons of oil equivalent (TOE) in 2010 to 257.2 million TOE in 2020 and 356.8 million TOE in 2030.

That is one ginormous amount of logistical work to do in the future.

As a way of appreciating what FRG stands to gain consider that in the past decade, despite all the publicity paid to Blackwater and other private security firms operating in Iraq and Afghanistan, the real money was made by the logistics firms like KBR and Parsons and Fluor. They operated there for the same reason that Willie Sutton robbed banks, because that’s where the money was. Now multiply those billions by a factor of hundreds and you begin to get an idea of what is at stake.

Of course, nothing is certain. Much will depend on factors outside FRG’s control, such as inputs from foreign oil companies, stability in the various African nations, the state of good governance or lack thereof, etcetera.

Still, it’s an exciting opportunity and it’s no wonder that FRG is pursuing it. Now if only Mr. Prince can do a better job of helping manage it than he did with Blackwater.